wonkiness: are we hurting or helping farmers?

[bz]

folks,

i wish everyone who cares about sustainably good coffee had attended the coffee conference in miami, ohio, last weekend. it would be impossible for me to describe to you the broad, cosmic overview of coffee that we witnessed, how we drink, how we're addicted to it, how it helps the poor, how it hurts the poor, how flawed americans' view of coffee can be, how specialty coffee is great, how it's spinning its wheels, etc.

george howell, ken davids, geoff watts and some other stalwarts of our specialty niche offered their usual rousing pitches about quality, estate-sourced coffee. it was great to hear. but what i've never heard before were some very sobering questions -- from economists, mostly -- about whether specialty coffee (or specifically the prices specialty pursues), on a large scale, hurts farmers. and frankly, no one in specialty coffee offered an answer (some may have missed the argument ... it was buried in some dry, droning, data-crammed lectures).

i've spent 3,500 words trying to grapple with this question on the blog, so i won't reprint it all here. if you're a masochist or a wonk, wade in. but the fundamental question is whether, for all the individual farmers who benefit from responsible direct trade, coffee farmers as a whole don't suffer from these relationships and the companion trend toward higher retail prices. we in specialty may not drink their mediocre crops, but economically they help sustain the entire industry. and there's no way that, if lower-quality farms disappear en masse (this is actually happening), specialty will be able to fill the gap with its sustainable models. meanwhile, there's a pretty good argument to be made that lower retail prices would do far more to increase demand and sustain farmers on a broad scale (or at least retail prices that more accurately mirrored the cost of green).

i don't have a side here. but i wonder how some of you would assess these dilemmas.

[Robert Goble]

Ben - what is your expertise here? Do you have a background in economics or economic journalism? How have you evaluated the various positions or ideas?

[bz]

robert: haven't you and i been over this before?

i attended the conference, took thorough notes, and collated the massive amount of information discussed as best i could. i do have a background in economic journalism, as i've discussed with you before, so i'm by no means flying blind here. it's important to note that i'm not pursuing any one thesis, nor am i going beyond what i heard at this point. one reason i posted here is that i assume there are some pretty good specialty arguments that simply didn't come up at the conference.

why the hostility?

[Robert Goble]

Why would you interpret a question as hostility? Can you give some information (and a context for those who might be new to you and your writing) as to your background, and where it might relate to your perspective or ability to represent the complexities of the ideas or situations of this particular piece of writing or subject(ie economics, and the economics of the coffee trade). There's nothing to be defensive about. Help your readers contextualize your position in the discussion (or your position as observer).

[Dan Streetman]

I am a little hesitant to wade into this discussion based on the fact this is not my area of expertise, but I will risk looking a fool to ask a question....

isn't there a rather broad assumption made by an economist to assume that lower prices would bolster worldwide demand and buoy the coffee industry, that quality would remain stable?

If I remember correctly it was maintaining a low price point that nearly killed the coffee industry, and saw consumption of coffee drop throughout the middle of the twentieth century because quality continued to slide.

we could also look at why low grade farms are failing en masse, and that is because the prices paid for low grade coffees do not meet the farmers needs, to cover the cost of production, and they can find more lucrative economic opportunities.

or maybe I am just way off base...

[jmc]

...Kopi Luwak, the expensive coffee famous for its sojourn through the digestive tract of the Asian palm civet, is coffee “from assholes for assholes.” ...

[IanClark]

The arguments of Correa do Lago, as outlined in your blog, make sense to me. To summarize my understanding:

1. The sustainability of the coffee industry requires a focus on increasing demand for ordinary coffee, increasing market access, increasing production & processing efficiency, increasing levels of consolidation and forward integration of small-producers, in addition to sustainable agroecological practices.

2. Specialty coffee, particularly super high end direct trade coffee, does nothing to promote these trends.

3. Specialty coffee, by normalizing high retail prices, works against these trends by mitigating growth in consumer demand.

To be honest, I don't see any flaws in this argument. It might be overstating the ability of specialty coffee to normalize high retail prices to the point of repressing consumer demand.

I've long felt that the coffee industry needs to focus on those reforms listed above, and that specialty is a fun niche to be a part of but is not significant in the long term sustainability for the entire industry. Ultimately reform of the commodity system is far more important, and that's the realm of Governments, NGO's and commodity buyers.

All the specialty industry can do is continue doing its best to return high prices to those producers who qualify while trying to avoid negatively influencing consumer demand by distinguishing products to the point that they don't impact expected retail prices for ordinary coffee (hey... maybe snobbery is a good thing!)

I'd also like to point out that Correa do Lago's arguments certainly make the Fair Trade vs Direct Trade debate a whole lot more interesting!

[Tim Dominick]

The hill of beans purchased using direct trade, transparency contracts and venues like CoE represent a rain drop in the ocean of production. While it does nothing to move the greater market, these programs directly impact the lives of the farmers, exporters and importers who live within the systems. It represents an alternative to the conventional system which, by all accounts, is broken. Honestly, if we are not buying C coffee is it our responsibility to inject our efforts into fixing that market, or are we better off breaking the tendencies and going our own way?

The movement, so to speak, appears to be gathering steam in the friendly confines of boards like this one, however in the greater market the "C" rules the roost, completely undaunted by the small fry that are seeking a new alternative. In a sense, our seemingly huge success is nothing more than noise or static in the greater scheme of things. I'm not attempting to tear down or heap scorn on anyone making a personal effort to improve lives, just remarking that collectively we are a pimple on the ass end of the coffee market.

All that said, I challenge anyone who holds to the theoretic notion that there is not a major impact on the small numbers of farmers, roasters and importers who have engaged in quality based pricing. It certainly is not the best option for every farm. If you sit at 600 meters we need to be honest and tell you to plant something besides coffee because it will be near impossible to enter the 87+ market.

My sister in law is working on her dissertation which is taking a critical approach to the marketing programs of equitable products in the US and Canada. She is well-versed on the academic and economists arguments, also equally in tune with the marketing trends. Coffee is obviously a significant player in this realm, however clothing and other products are following a similar program.

In her research she has concluded that the massive amounts of money spent on the marketing programs which oversimplify the message using iconic and largely symbolic marketing language and imagery are a greater threat to producers than small-scale individual projects. Small-scale activities are largely unknown to consumers and roasters must be more detailed and careful in the delivery of their message. They tend to avoid painting with broad strokes and preying on guilt and bad conscience.

[bz]

robert: if i read pushback where there wasn't any, i apologize. i hope my perspective is now clear -- that of an economic/political journalist with such a hopeless coffee habit that he drives to cincinnati for two days of lectures. nonetheless, this is only musing. not journalism.

dan: don't be hesitant. i'm interested in all perspectives.

isn't there a rather broad assumption made by an economist to assume that lower prices would bolster worldwide demand and buoy the coffee industry, that quality would remain stable?

the economists i heard didn't make any assumptions about quality at all. they were talking about effectual ways to make the economics of coffee more sustainable in broad terms. the brazilian fellow also isn't talking about artificially maintaining low prices. he talking about finding ways to make the market more transparent, so that retail prices more accurately reflect green coffee prices. as it is, it seems there is a vast inequity built into the system, where no matter how green prices fluctuate retailers can continue to push prices up and up.

the real fascinating thing for me here is that not only does is this a disincentive for farmers to improve their processes -- "better" coffee, short of the very high end, reaps little or no financial reward -- but it probably is a drag on overall demand, thus stunting the market for the farmer's product in the first place. it's a vicious cycle.

If I remember correctly it was maintaining a low price point that nearly killed the coffee industry, and saw consumption of coffee drop throughout the middle of the twentieth century because quality continued to slide.

i'm no historian, and i don't know about this. the history that was presented last weekend, by the UC Irvine guy, asserted that it was increased brazilian productivity tied to lower u.s. prices that started the first american coffee boom. it's that basic market mechanism -- more productivity equals lower consumer prices -- that doesn't seem to work any more.

the answer, according to Correa do Lago, could be to create dramatically more transparency, so that consumers are armed with knowledge. when green coffee prices go down, retail MUST go down too. broadly speaking.

[bz]

tim: there's no arguing, from what i can see, that farmers lucky enough to get direct-trade deals reap major rewards. it is not my intent to at all rain on the very exemplary, equitable trade practices developed by the standard-bearers of specialty coffee. it wold be absurd to criticize the quality and fairness they pursue, on an individual level.

the argument i heard is much broader, and it's this:

(a) you can't just do without C-grade coffee -- economically and morally. economically, this is the vast majority of the market, and so putting farmers out of business en masse would have major ripple effects, to say the least. the effects on specialty coffee would be hard to anticipate but almost surely unpleasant. (look to the subprime crisis for a basic economic example.) morally, we heard numerous tales from those who work in kenya, burundi and guatemala of farmers who stay in the business despite making no money. why? because there's literally nothing else to do. my immediate family lives in chad, in central africa, which is one of the few countries in that latitudinal belt of africa not growing coffee. and i can tell you: vast numbers of people sit around there and do absolutely nothing. so it's not at all a stretch to say that, if they can't grow coffee, many of them simply wouldn't do anything. this would be catastrophic. obviously, the coffee market as a whole (not specialty per se) is riding on the backs of these people. so there's moral responsibility there.

(b) so if you can't do without them, then how do you help them, short of handouts and subsidies and artificial prices? for an economist, you increase demand. that simple. what increases demand faster than anything? low prices.

(c) not only is the current trend in the opposite direction, but -- and this is where i'm uncertain -- the expectation specialty coffee creates of higher retail prices may actually contribute to the dampening of demand. i mean, just look at all the new york times articles about this crowd in the past year. although specialty is still a drop in the bucket in real dollar terms, it's cultural effect could be much larger on price expectations.

the brazilian economist and the world bank economist sort of added one further argument that i don't know if i agree with. they seem to fear that the direct-trade model creates a false illusion of having "arrived" at a proper model, when in fact it does nothing to change the broader economic inequity. again, a cultural impact here.

george howell, i might note, very clearly made a case for luxury coffee being "the answer" to success of the entire coffee economy.

[bz]

I'd also like to point out that Correa do Lago's arguments certainly make the Fair Trade vs Direct Trade debate a whole lot more interesting!

ian: as it happens, kim moore of transfair was at the conference and mounted a pretty interesting defense to the criticisms brought by howell and watts. but that's a separate post.

one other fascinating conference topic that i hope to blog about in coming days is the social aspect of addiction, and how much that plays a role in why we actually like this stuff.

[Peter G]

Ben-
I’m really sorry I couldn’t be there with you guys. Sounds like an interesting weekend.
Upon reading your article, I can’t tell if you are synthesizing a number of the ideas put forth by these academics into a broad critique of high-quality directly sourced coffee, or whether these were the arguments put forth by these speakers themselves. I’ll remain agnostic about the source of the arguments, and just argue them where I can. Suffice it to say I see a lot of twisted logic here, and misconceptions aplenty.
I’ll begin with the “seductive trajectory”

The commonly told story arc has commodity-grade Folgers giving way to status-conscious Starbucks and then to responsible, high-quality estate brews, and assumes by implication that someday soon most coffee will be sustainable and “good.”

I don’t see this as a commonplace idea at all. Instead, I suggest the following narrative: Folgers starts out as “good coffee”, and corporate greed and the green revolution contribute to lower and lower quality and prices for both consumer and producer. Despite lower consumer prices, coffee consumption dwindles. Specialty Coffee emerges, charging a higher price for a higher quality product. Consumer interest is sparked, coffee consumption increases (despite higher consumer prices) Those seeking to continue to push quality upward begin to isolate and reward truly remarkable coffees, paying the producers of these coffees the highest prices. Those attracted to the idea of high quality and sustainability advocate this business model.
That’s about where we are right now. I don’t see in this story any implication that someday all coffee will be sustainable and “good”. That is a huge leap.
Coffee, an indigenous popular crop in Ethiopia, was brought by slaves to Yemen, where it was introduced as an exotic foodstuff to the international trade. Its value established, it was then spread throughout the globe as a cash crop for colonialist empires, using plantations and enslaved or coerced workers. The means of production then shifted to a neo-colonial model, where the owners of tiny plots of land were encouraged to produce coffee for subsistence prices. The green revolution decreased the cost of production for the largest plantations, bringing quality down, and making it even harder for the small producer to compete in production of the low-quality, high-efficiency product of Brazilian mega-farms. However, small and medium sized producers who had the desire and resources to produce high-quality coffee for a growing specialty market could shift into this (separate) market.
Ok, on to what you describe in your article as “the most devastating critique” of the direct sourcing model:

The crux of farmers’ well-being, Correa do Lago says, is consumer demand. Coffee farmers in Brazil can — and have — made extraordinary gains in productivity, he said, but if consumer demand doesn’t increase along with more efficient production, then farmers don’t see any benefit. Instead, wealth is transferred to consumers by way of oversupply and lower prices.

The way to benefit broad swaths of coffee farmers — and thus make the market as a whole more sustainable — is to increase consumer demand. This, of course, isn’t done by raising the price of a cappuccino; it’s done by lowering it. To that end, Correa do Lago also criticizes coffee industry groups that worry more about how to divide the coffee cake — specialty versus commodity, robusta versus arabica — instead of devoting their muscle to making the entire cake bigger.

I asked Correa do Lago if this is an argument for artificially lowering retail prices. He insists that it isn’t. Instead, he suggests that the open market for coffee be made more transparent. If green coffee prices were widely published the way Americans keep track of their other biggest import — the barrel price of crude oil — then consumers would come to expect a cheaper cup of coffee when those commodity prices tracked lower, and retailers would have to offer those savings the same way public pressure helps push down gasoline prices at the pump.

As it is, commodity coffee giants such as Nestle have the clout and market share to buy huge amounts of green coffee at the going price, then hold steady or increase what it charges consumers even while green prices plummet. This, of course, fattens company profits and could actually be abetted by a specialty coffee sector that’s helping to create the expectation for higher retail prices.

This vast inequality of wealth continues unfettered while direct-trade coffee relationships create the illusion that the industry has “arrived” at fair farmer compensation, Correa do Lago told me. What’s more, he believes that most direct-trade contracts actually provide only minimal gains for individual farmers, year-to-year.

Ok, there is a bunch of logic to untangle here. Let me address the last idea first: that direct trade relationships create the illusion that the problems have been solved. It’s an interesting concept: that the existence of the Direct Trade model makes consumers assume that ALL coffee is sourced in that manner. Do we observe that to be true? This seems to be the only mechanism within Do Lago’s argument where Direct Trade is somehow damaging to all coffee producers. That’s like saying that the very existence of farmers’ markets is paradoxically bad for farmers, since it creates the impression that all lettuce is grown by small, happy, family farmers. Pretty weak, if you ask me.
But since you’ve restated that point when you say:

(c) not only is the current trend in the opposite direction, but -- and this is where i'm uncertain -- the expectation specialty coffee creates of higher retail prices may actually contribute to the dampening of demand. i mean, just look at all the new york times articles about this crowd in the past year. although specialty is still a drop in the bucket in real dollar terms, it's cultural effect could be much larger on price expectations.

Ok, so let me understand this logic: the existence of high priced Black Cat espresso shots somehow dampens demand for cheap bodega coffee in NYC? How exactly is this mechanism supposed to work? The reality is that specialty coffee is an ENTIRELY DIFFERENT PRODUCT than commodity coffee. Making this argument is like saying that the existence of fine restaurant makes McDonalds seem more expensive than it actually is.
This is where commodity-centric economists like Do Lago get it all wrong. Having been born and raised thinking of coffee like oil or feed corn, as an undifferentiated commodity, they are unable to grasp that commodity economics don’t apply to niche markets like specialty and especially direct trade coffee models. It’s just a different thing. Approaching consumer coffee prices like gas prices, where the daily price reflects variances in the global commodity market, is a tempting idea but totally bogus. The coffee market is way more complex than that. Macroeconomists have a hard time grappling with the locavore/farmers market movement too; they can’t understand why someone would choose to spend more for lettuce grown by a local farmer than that lettuce grown on a giant farm in California. But they do, and it is changing the way that produce is consumed. Niche markets are real, and you put enough of them together, and they create a real alternative to commodity markets.
It bears pointing out that Do Lago is coming from a very Brazil-centric position. In Brazil, the majority of coffee is grown by very large farms which are technified to some degree. To him, the commodity approach is logical. The thing is, it doesn’t have to be that way.

(a) you can't just do without C-grade coffee -- economically and morally. economically, this is the vast majority of the market, and so putting farmers out of business en masse would have major ripple effects, to say the least. the effects on specialty coffee would be hard to anticipate but almost surely unpleasant. (look to the subprime crisis for a basic economic example.) morally, we heard numerous tales from those who work in kenya, burundi and guatemala of farmers who stay in the business despite making no money. why? because there's literally nothing else to do. my immediate family lives in chad, in central africa, which is one of the few countries in that latitudinal belt of africa not growing coffee. and i can tell you: vast numbers of people sit around there and do absolutely nothing. so it's not at all a stretch to say that, if they can't grow coffee, many of them simply wouldn't do anything. this would be catastrophic. obviously, the coffee market as a whole (not specialty per se) is riding on the backs of these people. so there's moral responsibility there.

First of all, remember that C grade coffee is the BEST coffee that is usually included in supermarket blends and diner coffee, the rest being under-grade coffee purchased for cheaper, including “coffee byproducts” used to stretch coffee. This adulteration is done in the name of lower consumer prices, and is defended as a strategy to keep demand high by keeping prices low. Second, you CAN do without C grade coffee. Imagine, if the majority of the U.S. was consuming 3.00 cups of delicious coffee in restaurants, cafes, and at home; if this coffee was being sourced for fair prices from co-ops in Africa, Latin America and Indonesia….the world would be a lot better place. Think it’s impossible? You’ve used Burundi, Kenya and Guatemala as examples. In Burundi, the ENTIRE COUNTRY is of sufficient altitude to produce great coffee. Kenya could easily shift all of its production into very high quality coffee, with a minimum of “extra” sub-80 point coffee. Guatemala has effectively eliminated all of its low altitude coffee already, because of a lack of market. As Starbucks and the rest of us grow, the increase in demand for higher quality is growing too. Overall demand is shrinking (bad news for Brazil) but quality demand is increasing (good news for Burundi and the rest). This is nothing new, Starbucks is already buying a bunch of coffee from Burundi, at very good prices. Will this eliminate deprivation in Burundi? Certainly not, because externalities like overpopulation, corruption, disease, etc. have an effect too. Many of these facile arguments forget to take these into account; but then again so do we in the direct trade business.
Interesting discussion, I’m going to take a break and enjoy some sunshine. Looking forward to more. I have been critical in this post, but there is actually a lot I support in these arguments.

Peter G

[Rich Westerfield]

the argument i heard is much broader, and it's this:

(a) you can't just do without C-grade coffee -- economically and morally.

I read the blog when you first posted it and was surprised to hear some of the arguments against quality. Without copying your entire post here, it appears to me that the answer the economists are looking for is not going to happen in a traditional sense. While direct trade/specialty is only a tiny sliver, the one thing it has pointed to is an increasing demand for quality as well as price elasticity for it.

We on this forum know that most C-grade coffee doesn't taste very good. I'd guess that every one of us has experienced an interaction with someone who doesn't drink coffee because of their experience with C-grade. So a case can be made that not improving quality is what stalls demand.

Is increasing demand for coffee among consumers in Asia the answer? Maybe that's part of it. But even if that's the answer, those consumers will eventually want to start moving up the quality ladder. Might be years down the road, but eventually our progeny will be having this same debate.

Taking this in a completely different direction... if the case really is a choice of growing C-grade coffee or doing nothing in places like Burundi (and I'm having a hard time grasping that), then maybe more social economic effort and R&D resources need to be applied to identifying other uses for coffee and its components like pharmaceuticals, fertilizers, materials and other applications beyond traditional brewing. Broaden the horizons of what can be done with it and build new markets around those applications.

For the record, I'm neither a scientist nor economist. My career was in marketing. And when marketers have oversupply of goods, we look to create new stuff from it and develop new markets for the new stuff.

Anything happening on that front?

[Peter G]

Ok, I'm back. A few more notes for discussion:

I'm particularly interested in what you have written about Stuart McCook. The little factoids you have repeated from Mr. McCook's lecture seem to be factually wrong to me. Exhibit a: total coffee consumption declined steadily from the early 60s to the late 80s, a period of time that corresponded to the increase of robusta percentages in commercially available coffee. Coffee got cheaper (in real dollars) and tasted nastier, and consumers switched to soda in droves. Sounds like McCook might disagree with this history, though it is supported in all the economic data I have ever seen (which is admittedly sketchy). Exhibit b: Total coffee consumption leveled off and has ultimately increased as the specialty sector has grown in the United States. Percentage-wise, the Specialty sector increased dramatically, based on higher-quality, fresher coffees. Total coffee consumption continues to increase. Exhibit c: McCook calls arabica "prone to disease" (it is) and "chronic overproduction" (it is not). Robusta produces way more than arabica... McCook seems to be advocating FOR robusta production. Is this possible? The poorest coffee economies in the world are those based on Robusta production (West Africa, Vietnam, Indonesia)

From a market perspective, there seems to be no future in commercial-type coffee. The main consumers of this type of coffee are aging dramatically: my grandparents drank MJB but my baby-boomer father does not. Certainly, there is no reliable consumption of commodity-grade coffee by generations X or Y. They seem to either drink specialty coffee or none at all. In all markets, all-arabica, high quality coffees are more commercially successful, even at a higher consumer price. My worry as a coffee businessperson is not lack of demand, but lack of supply!!

And another little note: one thing that everyone agrees on: increased consumption of coffee of all kinds helps everyone. The SCAA and NCA (representatives of the specialty and commercial coffee industries, respectively) are openly in agreement and cooperate regularly on this count. I have experienced and participated in these cooperative consumption-increasing projects for years. I've never seen any organized attempt to decrease consumption by anyone.

Peter G

[Ric Rhinehart]

OK. This is too important to stay sidelined on. It would take longer than I have time to dedicate to pull up the citations, but if it becomes an issue I will. Let's start with what Peter very accurately points out as the center piece of the exceptionally faulty premise that this set of circular arguments is based on:

Exhibit a: total coffee consumption declined steadily from the early '60s to the late '80s, a period of time that corresponded to the increase of robusta percentages in commercially available coffee. Coffee got cheaper (in real dollars) and tasted nastier, and consumers switched to soda in droves.

From after the '76-'77 frost impacted years, prices went into a fairly consistent decline, and brand marketers chased the consumer with ever lower prices and ever lower quality. They believed, as did most economists, that decreasing price leads to increasing consumption. In the case of oil or technology, this is true. In the case of wine, coffee, organic produce and art, this is not true. People have assigned positive intrinsic values to products based on their use and perception of those products. That is, if wine tastes good, you want to drink it for a variety of reasons. If it tastes bad, you may still want to drink for the sake of getting drunk, but you certainly won't pay more for better taste (although you might pay more for higher alcohol content).

Many economists have apparently looked at coffee as a caffeine delivery system, and made the assumption that caffeine addicts will use more caffeine if they can acquire it for a lower price. The market place of the '70s and '80s gives lie to this. Not only did coffee get cheaper by the pound, but the producers of coffee beverages (offices, restaurants, fast food joints) prepared cheaper and cheaper cups using less and less coffee (resulting in worse and worse tasting beverages) and people left in droves. Coffee consumption went down because it tasted bad. Lo and behold...many coffee consumers drink coffee because it tastes good, not just for the caffeine delivery. Moreover, if consumers desiring caffeine can get it in a form that tastes good, they will pay more for that product.

There is an excellent parallel in the wine world. As California wine produces got better and better at producing good quality wines, they were able to push up consumption and price simultaneously. Again, as Peter so accurately points out, there are commodities that are without any gradients of quality from the consumer perspective - oil, soybeans, hard wheat - and there are consumer products that are highly differentiated. Regarding coffee as the former leads to perilously inaccurate modeling for coffee markets.

Fast forward to the '90s, and coffee consumers gain access to good tasting coffee, roasted from better quality arabica beans, ground just prior to brewing and brewed at an appropriate ratio in good quality equipment. Consumers raced to pony up twice or three times the going rate for cups of this coffee at Starbucks, and Coffee Connection and Peet's and dozens, then hundreds and now thousands of coffee houses across the country. Meanwhile, commercial coffee producers continued to chase price downward in the vain hope that this would spur consumption.

Next post we should look at the impact of the market place on low quality producers and address the Guatemalan model. As Peter noted, Guatemalan exports have switched to 85% HB and SHB qualities, with PW Guats nearly non-existent. This is no fun for the former PW producers, but speaks volumes to the markets ability to sort out the highest and best uses for land. (That ought to spark some conversation).

[andynewbom]

A thought for the fire:

If coffee is simply a caffeine induction mechanism and lower prices per "hit" would increase "consumption"...

then wouldn't that hold true for all drugs?

any studies on whether lower prices for heroin dramatically increase consumption? Likely yes. but if prices go up for higher quality heroin (and they do) do those same addicts just go without? Or do they do whatever it takes to get their hit?

It seems to me that for MANY consumers of low quality C and lower grade coffee the only reason they drink it is to get the lowest priced "hit" they can. It IS simply a caffeine delivery system so the lowest cost per drug hit is their driving force in buying coffee in the first place. They dont like coffee, they tolerate it to get the caffeine. It tastes nasty so they put splenda, sugar, cream and blueberry waffle coffeemate in it to cover up the nasty taste. THese same customer however will just as likely get their caffeine hit from coke, red bull or monster (and be willing to pay MORE per hit because it tastes good!)

I would bet that the adulterants that are put in most cups of low quality coffee cost more per cup consumned than the coffee itself.

Those mega commodity brazil and vietnam coffee machine farms should get in the business of producing coffeemate and caffeine concentrate to put in red bulls instead of trying to sell green coffee. pull the value into their model rather than sell the lowest value item at the lowest possible price in the highest possible volume. If you lose money on every bean can you really make it up by more volume?




and how about the idea that Peter and Ric are talking about where instead of focusing on ever increasing productivity (regardless of the cost) and striving to increase volume AND drive down the price of the item you sell by striping away value. What if instead the idea was to talk about total profit made by the farmer? NOT total revenue but total cash flow?

It seems from my limited economic knowledge that if you generate $10,000 in revenue it does not matter whether that was because you sold 100,000 beans at $.01 each or 10,000 beans at $1 each. The revenue is the same. As long as the costs were similar.

So if it costs you the same to produce 100,000 low quality $.01 beans as it does to produce 1,000 high quality $1 beans is either one "right" or "best"? Isn't it the overall market choice? If you can sell either bean in the right quantities which should farmers choose?

I agree with Peter that what we are seeing is a very alarming shortage of the best coffees and even of good but not great coffees. If you get a sample in and don't buy it within a day or two of its arrival it is almost always gone. And that is only if you were lucky enough to have it arrive unsold.

Coffee is sold too damned cheap as it is. When you see the backbreaking work and effort that goes into a pound of green coffee from the farmers side and then how little we value it and commodotize it it is sickening.

I wonder if you asked the actual coffee pickers and farmers:

"Would you rather get paid $1 for a days work or $10?"

what would they say? What would you choose? What are you willing to pay?

[Edwin Martinez]

Not yet mentioned is that the fastest changing factor in supply and demand which is encouraged by most coffee producing countries is increased consumption at origin. Brazil and Guatemala are doing a lot to encourage this. In Brazils case while their production, so is their population.

[bz]

scintillating. these are exactly the kind of perspectives i was looking for. i don't think you've been overly critical at all, peter. i figured these sorts of alternate histories/economic scenarios were out there, and that they might come from you. i appreciate both you and ric taking the time.

the conference was definitely heavy on the academic/economist side. very few specialty people were involved, and none of them argued the points mentioned here. this could be because there was such a staggering load of information to take in, and because people tuned in and out. there would typically be four speakers per panel, then someone to comment on the section and sort of synthesize the broader themes emerging. then four more speakers, etc. to answer peter's question, i've simply presented the arguments as they were made, though obviously i've stitched them together in a semi-coherent way. the arguments were made by the speakers themselves, and their names are cited.

i'm particularly intrigued by ric and peter's assertion (as well as james hoffmann's, on the blog) that american consumption dwindled as robusta use increased. it was indeed mccook's thesis that the specialty dynamic remains relatively small, and that by comparison robusta production is hugely important to people and economies and a "spectacular success" when you compare it to the fits and starts (mostly from disease) that arabica has suffered. he pointed to france, where in 1975 he says 75 percent of all coffee consumed was robusta, and then to the final stage in the "revolution" -- namely, vietnamese production. his assertion was that the robusta boom is largely enabled by u.s. consumers, and that corporate lobbying here got laws changed so that more robusta could be used to "adulterate" good coffee. he wasn't so much denigrating specialty coffee as he was defending the value of robusta as an economic engine.

obviously, data showing that this rise stunted consumption would turn this on its head. i'd love to see some, if it's handy.

ric said:

Many economists have apparently looked at coffee as a caffeine delivery system, and made the assumption that caffeine addicts will use more caffeine if they can acquire it for a lower price. The market place of the '70s and '80s gives lie to this. Not only did coffee get cheaper by the pound, but the producers of coffee beverages (offices, restaurants, fast food joints) prepared cheaper and cheaper cups using less and less coffee (resulting in worse and worse tasting beverages) and people left in droves. Coffee consumption went down because it tasted bad.

i've heard that the boom in cheap soft drinks was the impetus, not the decrease in coffee quality. would this be a factor, in your view?

peter said:

Let me address the last idea first: that direct trade relationships create the illusion that the problems have been solved. It’s an interesting concept: that the existence of the Direct Trade model makes consumers assume that ALL coffee is sourced in that manner. Do we observe that to be true? This seems to be the only mechanism within Do Lago’s argument where Direct Trade is somehow damaging to all coffee producers.

i don't think do lago meant it quite like that. he was saying that there's a danger in overreliance or overhyping of direct trade, because it contributes to (a) an illusion that this will fix the economic model -- is his view it won't -- and (b) it probably contributes to a consumer expectation for higher prices, which he believes to hurt demand.

i understand your point about quality enabling demand and price to increase in tandem, and obviously this has happened in recent years. but what about in tough economic times? the more an item is viewed as a "luxury," isn't it more likely that consumers will cut spending on that item when times get tough? and wouldn't this mean, at the very least, greater volatility if not long-term declines in consumption? i don't know the answer to this -- just asking. anecdotally, it seems like we may be going through just such a time. and to my mind it would seem to bode ill for anyone who has grown comfortable selling at a higher price point, and the farmers who supply them.

more broadly, you say:

The reality is that specialty coffee is an ENTIRELY DIFFERENT PRODUCT than commodity coffee. Making this argument is like saying that the existence of fine restaurant makes McDonalds seem more expensive than it actually is.

obviously, that's the mission of anyone who knows good coffee -- to differentiate it. but is this the perception of the market right now? i'm not so sure that most people see a difference in qualities of coffee the way they see it between mcd's and a fine dining establishment. i hate to say this, but even people i know who (a) love coffee, and (b) have had their mind blown by excellent beverages, they don't sit and think about where they want to buy a cup the way they might contemplate restaurant choices. whether it's the anniversary or the morning commute, coffee is still generally consumed the same way, no?

i, of course, don't like this one bit. but until specialty coffee makes a much larger dent in consumer psychology, can we assume that it's truly an alternative economic model? i don't really know the answer to this. i understand peter's notion of putting a lot of niches together to have a significant impact on the way a product is consumed. but i guess i'd love to see some kind of economic example, or scalable model that indicates this can actually happen. a lot of movements -- slow food, farmer's markets, etc. -- are gaining steam, but have done little or nothing to change the basic american food choice: grocery chains and fast food joints.

the broader theme of numerous speakers at the weekend conference was that better coffee -- specialty coffee in particular -- is a great idea, but overblown in its aims for being "good" and "fair" and unlikely to itself change the economics.

It bears pointing out that Do Lago is coming from a very Brazil-centric position. In Brazil, the majority of coffee is grown by very large farms which are technified to some degree. To him, the commodity approach is logical.

this is very true. another flaw i thought about in his argument is that, apparently, the current C-grade system is somehow rigged for certain parties, since higher retail prices and growing demand in recent years somehow aren't benefitting the farmers. so when he suggests lowering retail prices (or tying them to green prices) to further increase demand, i wonder how this would make a difference in a system that demonstrably translates so poorly to farmers' wallets. as we've seen with robusta in asia, higher demand doesn't necessarily make farmers rich.

... remember that C grade coffee is the BEST coffee that is usually included in supermarket blends and diner coffee, the rest being under-grade coffee purchased for cheaper, including “coffee byproducts” used to stretch coffee. This adulteration is done in the name of lower consumer prices, and is defended as a strategy to keep demand high by keeping prices low.

so this actually appears to be a very old argument. my question is, has it worked?

... you CAN do without C grade coffee. Imagine, if the majority of the U.S. was consuming 3.00 cups of delicious coffee in restaurants, cafes, and at home; if this coffee was being sourced for fair prices from co-ops in Africa, Latin America and Indonesia….the world would be a lot better place.

Overall demand is shrinking (bad news for Brazil) but quality demand is increasing (good news for Burundi and the rest). This is nothing new, Starbucks is already buying a bunch of coffee from Burundi, at very good prices.

so, are you saying that the macroeconomics of coffee don't apply to specialty? put differently, do you believe the specialty sector would remain unscathed if there were a sudden, large-scale collapse of mediocre coffee farms? some of the experts from developing countries seemed to think this was possible, and that the ripple effects would hurt everyone. the implication i got (and no one stated this explicitly) was that even if we don't drink the coffee, specialty has an economic interest to be concerned for the broader market -- and farmers in particular.

peter said:

From a market perspective, there seems to be no future in commercial-type coffee. The main consumers of this type of coffee are aging dramatically: my grandparents drank MJB but my baby-boomer father does not. Certainly, there is no reliable consumption of commodity-grade coffee by generations X or Y. They seem to either drink specialty coffee or none at all. In all markets, all-arabica, high quality coffees are more commercially successful, even at a higher consumer price.

do you disagree, then, with mccook's figure about specialty being about 20 percent -- max -- of the market? or is it that you see huge growth still to come?

ric said:

There is an excellent parallel in the wine world. As California wine produces got better and better at producing good quality wines, they were able to push up consumption and price simultaneously. Again, as Peter so accurately points out, there are commodities that are without any gradients of quality from the consumer perspective - oil, soybeans, hard wheat - and there are consumer products that are highly differentiated. Regarding coffee as the former leads to perilously inaccurate modeling for coffee markets.

i understand this, and it is certainly our viewpoint and the viewpoint of people who drink specialty coffee. i wonder if the key difference with wine is that it's produced at no small cost in italy, france, california and australia. coffee, in the other hand, is still produced by third-world populations in burundi, kenya, colombia, etc. in other words, the huge majority of the producing end of the scale still views it as a commodity, in addition to a large percentage of consumers. doesn't this limit the extent to which coffee can be compared to wine?

Guatemalan exports have switched to 85% HB and SHB qualities, with PW Guats nearly non-existent. This is no fun for the former PW producers, but speaks volumes to the markets ability to sort out the highest and best uses for land. (That ought to spark some conversation).

ah, the moral question. i really don't know where to start with that one. obviously, we should care. however, guilt-based subsidies for economically inviable markets don't seem to be a good idea, either (the world bank economist had a great burundi study showing that if the government intervened on behalf of coffee prices that very little of the added revenue would actually trickle down to the poorest who need it most).

as far as ric and andy's suggestions about producers seeking alternate products for bad coffee, there was (shockingly) nothing presented on that front at the conference.

again, i'm hugely appreciative for the discussion. i hope it's clear that my questions are attempts to fully understand the specialty position (to which i am biased) and not pugnacious or contrarian in any way.

[bz]

Not yet mentioned is that the fastest changing factor in supply and demand which is encouraged by most coffee producing countries is increased consumption at origin. Brazil and Guatemala are doing a lot to encourage this. In Brazils case while their production, so is their population.

i did mention this on the blog. it's encouraging to see, and it occurs to me that the coffee trade may end up most "fair" when american consumers have to compete on an equal footing with guatemalan and brazilian consumers for the best stuff.

[andynewbom]

a quote from one of our farmers that we buy from. This is from her statement on the COE website. Saw it today and thought it was appropos here.

"For Gloria, producing truly specialty coffees is one great example of a win-win situation, since it means better conditions for the farm, the grower, the miller, the workers and the country overall."

http://www.cupofexcellence.org/CountryPrograms/ElSalvador/2008Program/WinningFarms/tabid/427/ItemID/975/Default.aspx

[andynewbom]

another interesting one


great quote:

"The good news for a struggling Starbucks: The recent economic slump hasn't quashed Americans' tastes for gourmet coffee.

From Pete's Coffee to McDonald's (nyse: MCD - news - people ) to Dunkin' Donuts, the market's awash in successful imitators, despite the downturn. Grocery store sales of premium coffee beans are growing at double-digit rates annually.

"No one wants Folgers," says industry analyst Steve West of Stifel, Nicholas, citing an entire young generation of professionals for whom upscale coffee has become the standard. "

but it does say that peeps are going for cheaper, crappier mclattefroufrounoncoffeesugarbombs
but those aren't coffee.
http://www.forbes.com/business/retail/2008/11/10/starbucks-mcdonalds-coffee-biz-commerce-cx_tvr_1110coffee.html

[Brent]

Coffee has a quality triangle. The top coffee at the top of the pyramid is in short supply, and conversely you would expect to be at a premium price.

The arguments for pushing the envelope at the top are many, varied, and really, I just want to try the coffee.

What a lot of academics forget when talking about the pricing and demand etc is that they are applying the assumption that the producer can switch to other products in much the same manner that the same academic changes underpants, alas it aint that simple, and that is where the problems and arguments come into play.

Thats my initial thoughts on my speed read that I didn't already pick up in the discussion...

[bz]

What a lot of academics forget when talking about the pricing and demand etc is that they are applying the assumption that the producer can switch to other products in much the same manner that the same academic changes underpants, alas it aint that simple, and that is where the problems and arguments come into play.

great point. and actually, some of the wonks at the conference did mention that, in some contexts, it's very difficult for farmers to do anything but coffee. it would be nice to assume the marketplace will always winnow the chaff, ferreting out those who shouldn't be in the business and pushing them into something else. alas, in africa especially, it just isn't that simple. and if our current economic woes teach us anything, it's that the market does not always ferret out the weak links the way it is supposed to. particularly where the market for a product flows through many complex layers of the self-interested wealthy few.

the more i think about this issue, the more it SEEMS like peter and ric are saying that specialty coffee is a totally separate, self-sustainable market economically. no one has quite said it this way, but IF this is the case, then this would obviously be a huge selling point and one we could flog relentlessly.

in other words, would the trade relationships in specialty coffee be insulated from any major disruption in the c-grade market? if these fence-riding farmers went under en masse (as some of the academics suggested), could specialty coffee and its prices remain unscathed -- or even expand to fill the supply gap? this would be a major market disruption, but could effect the dramatic spread of specialty standards among consumers and producers, no?

[Peter G]

One time my Dad told me: "Peter, one thing I have learned is this: the economy is so big it's impossible even to imagine."

He's right. Economists are skilled scientists, but even they struggle to tease out cause and effect within complex systems. They're pretty good at it, but it turns out that many of their assumptions get turned on their heads in real life. My best friend is an agricultural economist at Duke. He uses economic tools to evaluate policy decisions in a single sea urchin fishery in Oregon. To describe the complex behavior of how a single catch-limit policy impacts this fishery, he creates gigantic formulas that take up an entire typewritten page. I have one of these formulas framed on my desk. It reminds me of how complex the world is.

Everything in coffee is connected. Robusta, Brazil Naturals, C-grade, Mexican Prime Washed, Guatemala SHG EP, Esmeralda Special... they're all part of one big coffee producing and consuming organism. And organisms have a way of adapting and transforming to their environment. Sometimes that transformation is easy, sometimes it is painful, but it is never predictable or simple.

I am attending a conference this weekend in Costa Rica. Today I learned that cost of production can vary from about 60 cents to 1.50 per pound on a single farm in Costa Rica. Imagine! This is a single farm in a single environment producing a single quality of coffee. How can we possibly speculate on cost of production with that kind of variance? I also learned that India, 3rd largest producer of coffee in the world, will become a net importer of high quality coffee, while they continue to export low-quality robustas and arabica naturals for instant coffee manufacture in Europe and Asia. This is one of the poorest countries in the world, and I heard the CEO of a major Indian coffee company say that he would probably be buying relatively expensive Central American coffees within a year or two, which he would sell at his chain of coffeeshops and kiosks throughout India. He plans to expand to China, too.

My little story about the rise of robusta, the decline of quality, and the emergence of the specialty revolution has a significant kernel of truth, but the reality is that this story is an oversimplification of an incredibly complex history. While it is tempting to see trends in these kinds of macroeconomic histories, it is ultimately like seeing animals in clouds. Sometimes there are patterns, sometimes randomness fools you into thinking that a pattern exists when there is in fact no pattern, and almost always the truth lies somewhere in between. When a butterfly in Bejing flaps its wings it rains in Central Park, except that usually it doesn't.

I say this not to quash the conversation, but instead to temper the arguments here a bit. Each of these points could be analyzed and argued for days. And we should do this- every time we do we get closer to the truth. Direct Trade is not the answer, it's really not anything at all, yet. It's a set of principles, sometimes loose depending on the practitioner, which a handful of companies are using. While the C market is influential, a surprisingly small amount of coffee is actually traded there. To say that "Direct Trade hurts the farmer more than the C system does" assumes that both systems are more monolithic than they actually are, and can be evaluated as discrete entities. They cannot, really.

Forgive me for getting all philosophical here, but I was having a hard time keeping track of all the arguments and I wanted to take a step back.

From where I sit, the macroeconomics look like this: consumption of coffee is increasing everywhere in the world, including new markets in developing countries. Meanwhile, land use pressure and climate change are putting the damper on supply. The world is losing its taste for instant robusta, and becoming habituated to milky arabica-based beverages which are more expensive but drunk in smaller quantities. All this spells pretty good news for arabica producers in Burundi, Guatemala and Indonesia, if you ask me.

Peter G

[Tim Dominick]

Peter's point about interconnectivity between C, FT, and Direct Trade plays itself out on every farm and in every co-op.

I got a glimpse of just how connected the system is recently. An association of farmers that produces just over 100 containers of coffee annually sells into all three of these markets. A tiny fraction of the production is sold with the distinction of a micro-lot, a slightly larger percentage (perhaps 2-4%) is sold at a premium and the rest is headed to FT or C lots.

In a good year this group will sell a half-dozen or so containers at a premium well past FT and the rest will go as FT containers. In a rough year most of the containers will be at the whim of the C. The association is astutely aware of their reality and it is up to the management to eek out a profit with the cards they are dealt. The decision of roasters to work closely with this association in an effort to maximize the potential of the coffee is one tool, knowing when to fix and hedge are others. Our "wonkiness" does not impact their ability to sell the remaining 95.999% of the association's coffees, however it may help them sell more above "c" or FT minimums as time goes on because they begin to evaluate and differentiate quality .

Earlier this year I was on a highly respected estate. I walked by a huge pile of stinking cherries ranging from rotting overripes to green. It was the last of the season's strip picking. I jokingly asked "how much for the coffee" and learned that the farmer considered this the icing on his cake. He pays very little to pick and process this stuff then sell it into the domestic market for around $70 for 100 pounds (only dried to ~15%). He joked about how terrible it would taste. Then he said in a bad year that pile has represented his last, best shot at profitability.

This farm has produced CoE coffees and has relationships with leading roasters, yet the farmer freely admits that he sells complete crap because someone will buy it and roast it.

We may have added another small twist to the coffee market, but every farmer has to deal with the notion that in a year they will have coffees that meet the needs of several markets. Balancing production costs, dealing with the strength or weakness of the dollar, and the unforeseen whims of the market must keep them up nights. Learning how to maximize the opportunities the system presents is the key to survival.